Applicability of CST/ K-VAT on E-Commerce Transactions

Introduction

The business model of e-com firms is they provide a platform for enabling sellers of goods to be able to sell without boundaries of location across the Country and at times the world at large. E- Com companies may not engage in directly selling goods to end customers.

There has been a lot of controversy surrounding the operations of online retailers in India such as Amazon and Flipkart. Normally, e-commerce company (e-com co) charges commission / delivery charges and undertakes to facilitate the transaction. They may in some cases perform packing and marketing / delivery of the goods to the final consumer directly or indirectly. The invoices are made by the  independent sellers directly to the customers. The sellers could be keeping the goods stored in racks /shelves of the common warehouse of e-com companies in each State.

The Commercial Taxes department in states such as Karnataka is not able to keep track of the on-line sales made and values at which goods are sold. They are questioning the registration being taken by more than 1 seller in the address of warehouses operated by the e-com companies.

Also States are examining whether by reason of the fact that the sale completes in their State, they can collect the local taxes.

The main objection of the States in an e commerce transaction comes when goods from outside the State are sold within the state is that they get nothing.

As far as CST law is concerned, goods purchased online would be liable to CST ONLY where they move from one state to another as a consequence of sale. Therefore ONLY the originating State would get revenue. This is so even in case of Cash on delivery where the consumer may refuse the consignment. The Supreme Court has held that VPP is a CST sale.

Some States such as Maharastra and Assam are examining how to collect “Local Body Tax” or “Entry Tax” on goods under e commerce. Legally this may not be possible as on date as long as there is no undervaluation of goods.

In some States like Kerala they have as far back as 2004/5 identified that couriers who carry goods need to register and file online information before entry into the State. From 2011 this procedure has been pushed and now it is being insisted on.

As CST/ VAT are leviable on sale of goods, the sustainability of VAT levy on E-com transaction are examined below:

When is VAT levy attracted?

The charging section 3 of K-VAT Act states “the tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act.” Therefore to be covered under the levy of K-VAT, there should be a sale of goods.

KVAT is leviable on the sales within Karnataka. There has to be a transfer of property in goods for cash, deferred payment or other valuable consideration, by way of sale within the State by the registered dealer or dealer liable to be registered to attract VAT liability.

Who is liable to pay VAT?

The tax is levied on sale of goods within State by registered dealer or dealer liable to be registered.. As per Section 8 the 'agents' are also liable to pay tax.

The tax is payable only by a person who is a dealer. Dealer is any person who carries on the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for commission, remuneration or other valuable consideration. It also includes a casual dealer, commission agent, broker, who carries on the business of buying, selling, supplying or distributing goods on behalf of any principal. It also covers every person who acts as agent of a non-resident dealer.

The agents effecting purchase or sale of taxable goods on behalf of any principal who is resident in Karnataka are liable to VAT on such transactions, even if the principal is not dealer or his turnover is less than the specified turnover for registration under KVAT Act. In respect of such transactions, the principal is not liable to pay VAT. This provision is not applicable to the commission agents acting as selling or buying commission agents on behalf of non-resident principals.

Though the transfer of property in goods does not take place from the e-com co.  At same time, if ecommerce co is engaged in distributing or supplying, handling goods of merchant to the end consumer, then it could be considered to be dealer under VAT laws of State. In which case ecommerce co could be treated as a dealer to that extent. In such cases there maybe no liability to pay and therefore unless the Commercial taxes dept. wishes to monitor these transactions they may not insist on e com companies to register.

Whether service tax is leviable on e-com companies?

The Service tax is certainly applicable as they are marketing intermediaries provding/ facilitating sales. The transport facilitators and couriers could BOTH be liable as couriers and the 75% abatement may not be available as the transaction would be time sensitive and has door to door delivery built in.  The amount charged by the logistic companies for warehousing would also be available to service tax.

Service providers may examine the possibility of credit of excise duty/ CVD paid on the capital equipment such as rack, vehicles and other specialized inputs in addition to input services which they are presently availing. 

Way forward

Instead of driving out investment, a possible measure to ensure better transparency and compliance could be to issue branch registration to dealers warehousing with e-com cos, and collection of applicable CST/ VAT on their transactions. The e-com firms could be required to disclose the information about all transactions done on their platform. State to be able to satisfy itself that all the transactions are covered as well as no undervaluation is taking place.